Chapter - III

MICROFINANCE

3.0 Introduction

Microfinance is the provision of loans and other financial services to the

poor. The microfinance has evolved due to the efforts of committed individuals and

financial agencies to promote self-employment and contribute to poverty alleviation and

provision of social security. India has been able to develop its own model of

microfinance organizations in the form of savings and credit groups known as the Self

Help Group (SHGs), which are bank-linked. These SHGs are mainly formed and

managed by women and this has become an instrument, which has led to women's

empowerment and social change. Most of the microfinance institutions in India attempt

to go beyond savings and credit groups to provide microfinance services in the form of

savings and insurance.

Microfinance provides financial services to those whose income is small

and unstable. These people are in need of credit facilities for several reasons (i) their

needs are small and arise suddenly (2) the institutional providers of finance namely the

banks demand collateral security which they cannot provide (3) most of the time, they are

in needs of funds to meet their consumption demands, for example, to meet expenses

related to education, illness, funerals, weddings for which it is difficult to obtain

institution finance (4) for purpose of investment in income generating activities.1

Concept of Self Help Group (SHGs) is the most exciting discovery in the

context of microfinance. The Indian microfinance scene is dominated by SHGs and their
linkage with Banks. Owing to the importance of microfinance and self help groups in the

eradication of poverty and in the empowerment of women.

3.1 The Concept of Microfinance

Microfinance is a concept that is helping the poor to avail of an create

opportunities for economic growth. In India, microfinance has fulled the efforts of rural

development, women empowerment and wealth generation by providing small scale

savings, credit, insurance and other financial services to poor and low income

households. Microfinance thus serves as a means to empower the poor and provides a

valuable tool to help the economic development process.

The concept of microfinancing and self-employment activities in rural areas

has developed considerably over the last two decades. It is working neither on

domain/charity nor on subsidy. It is basically rotational investment done to motivate the

poor to empower themselves and practice the dictum 'Save for the future and use those

resource during the time of need.' Theoretically, microfinance also known as microcredit

or microlending means making provision for smaller working capital loans to the self-

employed or self-employment seeking poor.

Microcredit has defined as the extension of small loans to be given in

multiple doses based on the absorption capacity of the needy beneficiaries, who are too

poor to qualify for formal bank loans, as they have no assets to offer as collateral security

against loans.2

'Microcredit' may be defined as the credit and repeated credit provided in

small measures to suit the recipient's requirements, with a comfortable pace of repayment

and at an appropriate rate of interest.3 Microcredit has been defined by the microcredit
summit held in Washington D.C. in February 1997 as "programmes that provide credit

for self employment, other financial and business services to very poor persons."

Microfinance can be interpreted in a broader context both as microcredit and

microsavings, even though microcredit and microfinance have come to used

interchangeably. However, when the term 'microfinance' is used it implies some other

services accompanying credit viz. facilities for saving and availability of services for

insurance of the assets acquired with microcredit. Microfinance has come to be referred

to as a small scale financial services and technical assistance provided to rural people

who operate small or micro-enterprises, provide services, work for wages or commission

and other individuals and group working at local levels.4

NABARD has defined microfinance as "provision of thrift, credit and

other financial services and products of very small amounts to the poor in rural, semi-

urban and urban provided to customers to meet their financial needs; with only

qualification that (1) transactions value is small and (2) customers are poor."5

In essence, therefore, microfinance could be referred to as an institutional

mechanism of providing credit support in small amount and usually linked with small

groups along with other complementary support such as training and other related

services to the people with poor resources and skills for enabling them to take up

economic activities. In the November 1995 Microcredit Summit, U.S. first lady Hillary

Clinton wrote; "Microenterprise is the heart of development because microenterprise

programmes work - they lift women and families out of poverty. It is called micro but its

impact on people is macro, we have seen that it takes just a few dollars, often as little it

takes as dollar 10, to help a woman gain self employment, lift her and her family out of

poverty. It is not a hand out; it is a helping hand."6

 Let us begin by understanding some of the distinct characteristics of

microfinance. The term 'microfinance' is often confused with the related term

'microcredit', so much so, that the two are often treated as synonymous and used

interchangeably. While there are certain similarities between the two terms, there are also

certain differences, which require to be classified at the very start to avoid confusion of

time.

The term microcredit refers to a small size loan, to be repaid within a short

period of time, used mostly low income households and micro entrepreneurs for the

purpose of income generation and enterprise development. The mobilization of such

credit is restricted to external sources such as banks and moneylenders.

Microfinance on the hand, provides a greater menu of options whereby the

small loan can be garnered not just from the external sources but also through self-

mobilization, by way of saving and sale of assets. Also, in case of microcredit, due to the

definite obligation to repay the loan, a physical collateral may sometimes be needed.

However, the biggest flexibility in the case of microfinance is the lack of any physical

collateral, even in case of loan from the bank. The options available with microfinance,

therefore, are much broader and flexible than the ones available with microcredit.

Table-1 brings out the distinct variations between microcredit and

microfinance with respect to their loan characteristics.

Table 3.1 : Difference between microfinance and microcredit

S.No. Characteristics of loan Microfinance Microcredit

 1. Size of loan Small Small

2. Repayment of period Short Short

3. Sources of mobilization Both external and External

internal

4. Repayment Obligation if source Definite obligation to

external repay

5. Collateral Not needed May or may not be

needed

6. Purpose of use Flexible, Mostly fixed, limited

consumption income scope for deviation
generation

7. Scope of operation Mostly group loans Usually individual

trickling down to loans, though group
individuals loans might be given

Microfinance therefore, refers to the provision of small loans without

collateral security, to the poor and low-income households, whose access to the

commercial banks is limited. The institution that provide such services are microfinance

institutions.7 Microfinance is being viewed as a very powerful tool for uplifting the

economic conditions of the asset less poor through group approach that ensures active

participation and involvement of the beneficiaries in effective implementation of the

programme. In India, microfinance programme has a crucial role to play in uplifting more

than 30 crore people living below poverty line (NABARD, 2005). Poverty means denial

of access to the basic necessities i.e. food, shelter, health and education of human

existence. Poverty is characterized by lower standard of living. As per the poverty line

defined by the HRD i.e. earning of a person below $ 1 a day, the percentage of BPL
population in India comes around 34.9 percent and if it is extended to $ 2 a day, the

percentage of BPL in India comes to 79.9 percent (Human Development Report, 2004).

Microfinance has emerged as an needful programme to cater to the needs of

the most underprivileged people i.e. tribal, dalits and women. The major concerns today

is ever increasing poverty and there is urgent need of empowering enabling the most

neglected sections of the society through organized support to all poverty alleviation

programmes. Considering the paucity of funds with poor people, the need of the hour is

to provide adequate credit to the needy people to enable them to undertake

entrepreneurial activity, however, small with the help of NGOs and GOs. Microfinance is

expected to play a pivotal role in poverty eradication and employment generation.

Microfinancing is a new method to meet the credit requirement in rural

areas. Since the bank borrowing requires collateral and the deprived class does not have

any type of such collateral, the success of Bangladesh Grameen Banks attracted the

attention of Indian policy makers towards the microfinance and microcredit, which are

the new entrants in realm of present rural financing. Microcredit is based on 20 self help

groups which will be technically supported by NGOs and sponsor bank. In other words,

self help group is a small, economically homogeneous and cohesive group of rural poor

voluntarily coming together to save small amount regularly, agree mutually to contribute

to a common fund and have a collective decision making for providing collateral free

loans on terms and conditions decided by the group. The group will make a project,

which will be supervised and assisted by banks and NGOs. After evaluating the viability

of the groups, the banks further provide sufficient community participation in the

development process.8

3.2 Trickle Up Approach of Microfinance

 Most of the developed nations of the world started their growth path from

the development of the agriculture sector. For a long time, it was felt that the growth of

developing countries is dependent on the growth path developed countries, i.e. through

the trickle down strategy. This is the economy theory which advocates letting ultimately

trickle down to lower income individuals and the rest of the economy. In other words,

this is a theory of economic development that claims higher standards of living for the

poor will develop gradually with economic growth. The same applied on the macrolevel

in the individual countries, which started believing on the concept of laissez-faire policy.

However, there were countries like India and Israel; which did not believe in the free

market economy and continued with their public expenditure programmes. Along with it,

attention was made to make a self-sustained economy at least from the view point of the

agriculture sector. However, it took a long time to realize that if the gains of development

have to go to the poor, then some different strategy has to be adopted.

When the Grameen Bank of Bangladesh started its foray into microfinance

in the middle of 1970s, it was realized that it can definitely be a good way for the benefit

of the poor then it was the realized that it is not the trickle down approach but it is the

trickle up approach which should be adopted to upgrade the living of the poor. Trickle up

would therefore mean that the benefit should be directly provided to the poor so that they

can invest it accordingly for their own development and would try to improve their living

standard. The countries were providing direct finance earlier also, but since the late 1970s

it was realized that if one wants benefits to be passed to the poor ensuring its true use and

accountability, then microfinance is the best alternative.

In the development paradigm, microfinance has evolved as a credit based

policy and programmes to cater to the so far neglected target groups (women, poor, rural,
deprived etc.). Its evolution is based on the concern of all developing countries for

empowerment of the poor and alleviation of poverty. Development organization and

policy makers have included access to credit for poor people as a major aspect of many

povery alleviation programmes. Microfinance programmes have in the recent past

become one of the more promising ways to use scare development funds to achieve the

objectives of the poverty alleviation. The basic idea of microfinance is simple; if poor

people are provided access to financial services including credit, they may very well be

able to start or expand a microenterprise that will allow them to break out of poverty.9

3.3 The Important Features of Microfinance are

1. Microfinance is a tool for the empowerment of poor women;

2. Loans under microfinance programmes are very small;

3. Microfinance targets the poor rural and urban households;

4. Credit under microfinance follows thrift i.e. mobilize savings and lend the same;

5. Low transaction cost due to group lendings;

6. Transparencies in operation;

7. Short repayment period;

8. Simple procedure for reviewing, processing and approving loan applications and

delivery credit;

9. Chances of misutilization are rare and there is assured repayment;

10. Peer pressure act as the collateral security required for loans;

11. Need based loan disbursement;

12. Prompt repayment; and

13. There is no ceiling from the RBI in respect of minimum and maximum amounts.

The following are the main features of microfinance services provided by

Rashtriya Mahila Kosh (RMK) (i) It is a tool for the empowerment of the poorest. (ii)

The higher the income and better the asset position of the borrower, the lower the

incremental benefit from further equal doses of micro-credit is likely to be. (iii) Delivery

is normally through Self Help Groups (SHGs). (iv) It is essentially for providing self-

employment. The opportunities of wage employment are limited in developing countries

- microfinance increases the productivity of self-employment in the informal sector of the

economy - generally used for (a) direct income generation (b) rearrangement of assets

and liabilities for the households to participate in future opportunities and (c)

consumption smoothing.11

Microfinance is not a financing system but a tool for social change,

especially for women. It does not spring from market forces along - it is potentially

welfare enchaining there is public interest in promoting the growth of microfinance - this

is what makes it acceptable as valid goal for public policy.

3.4 Profile of Microfinance in India

The profile of microfinance in India at present can be traced out in terms of

poverty. It is estimated that 350 million people live below poverty line. The following are

some components of microfinance :-

(a) This translates to approximately 75 million households.

(b) Annual credit demand by the poor in the country is estimated to be about Rs.

60,000 crores.
(c) A cumulative disbursement under microfinance programmes is only about Rs.

5000 crores.

(d) Total outstanding of all microfinance initiative in India estimated to be Rs. 1600

crores.

(e) Only about 5% of rural poor have access to microfinance.

(f) Though a cumulative of about 20 million families have accepted accessed.

(g) While 10% lending to weaker sections is required for commercial banks; they

neither have the network for lending and supervision on a larger scale or

confidence to offer term loan to big microfinance institutions.

(h) The non poor comprise of 29% of the outreach.

3.5 Need for Microfinance

Microfinance aims at assisting communities of the economically excluded

to achieve greater levels of asset creation and income security at the household and

community level. Access to financial services and the subsequent transfer of financial

resources to poor women enable them to become economic agents of change. Women

become economically self-reliant, contribute directly to the well being of their families,

play a more active role in decision making and are able to confront systematic gender

inequalities. Access to credit has been given considered a major poverty alleviation

strategy in India. Micro-credit has given women in India an opportunity to become agents

of change. Poor women, who are in the forefront micro-credit movement in the country

use small loans to jump start a long chain of economic activity.

 Microfinance is accessing financial services in an informally formal route,

in a flexible, responsive and sensitive manner which otherwise would not have been

possible for the formal system for providing such services because of factors like high

transaction cost emanating from the low scale of operation, high turnover of clients;

frequency of transaction etc. Microfinance and self help group must be evolved to see

that SHGs do not charge high rates of interest from their clients and improve access to

those who cannot sign by their use through thumb impression.

The current literature on microfinance is also dominated by the positive

linkages between microfinance and achievement of millennium development goals

(MDGs). Micro-credit Summit Campaign's 2005 report argues that the campaign offers

much needed hope for achieving the millennium development goals especially relating to

poverty reduction. IFAD along with food and agriculture organization (FAO) and the

world food programme (WFP) declared that it will be possible to achieve the eight MDGs

by the establishing deadline of 2015 "if the developing and industrialized countries take

action immediately by implementing plans and projects, in which micro-credit could play

a major role."11\

Credit is vital to the poor for overcoming the inevitable and common

imbalance between income and expenditure. Credit is also crucial to the poor for income

generating activities, like investing in their marginal farms or other small scale self-

employment ventures. Their access to formal banking channels, however, is limited due

to their low resource bases as well as due to the nature of formal credit institutions. The

popularity of the microfinance, self help groups stems from widespread recognition that

formal banking channels are largely ineffective in catering to the credit needs of the poor.
 Tiny savings and loans are generally an unattractive business proposition

for formal banking institutions. In addition to disincentives faced by the banks, there are

also problem faced by the poor in accessing loans from formal banking institutions. For

example, to minimize risks, banks demand, collateral security that the average micro

borrower does not possess. Banks also insist on complicated procedures that are too time

consuming and often too complicated for the poor and illiterate. Even in the

implementation of direct lending programmes formal institutions find it difficult to

overcome the problem of targeting. The experience is that the rich and powerful typically

manage to corner the scare loanable funds. Thus formal banking channels remain largely

inaccessible to the poor in India. As a result, the poor continue to be dependent on

informal sector lending, paying exorbitant rates or underselling the product and their

labour power to the creditor. It was in response to these limitations in formal banking

channels that micro credit mechanism were innovated.

A quite from the former U.N. Secretary General Kofi Annan's video

message on the launch of the international year of micro credit on 18th November 2004

also shows the significance of microfinance. "Microfinance has proved its value, in many

countries, as a weapon against poverty and hunger. It really can change people's lives for

the better - especially the lives of those who need it most …. Let us be clear.

Microfinance is not charity. It is a way to extend the same rights and services to low-

income households that are available to everyone else. It is recognition that poor people

are the solution, not the problem. It is a way to build on their energy and vision. It is a

way to grow productive enterprise and so allow communities to prosper."12

3.6 Comparison of Microfinance and Financial Banking

 Figure outlines the different features between for banking channels and

micro finance channels. In contract to formal banking, micro-credit is characterized by

small size, shorter loan duration, emphasis on thrift and the absence of collateral security

and informal procedures. In absence of collateral security and formal documents, there

can be little legal, however, has proven even more effective than loan repayment

mechanism in the formal banking system. While the banking system is a purely

commercial organization, the lower tiers in the micro finance system are social

organizations and motivated by non-economic objectives.

Comparison of Micro Finance and Formal Banking.

Characteristics Micro-finance Formal Banking

 Size of loan  Small/tint size of  Medium/large credit

credit

 Duration of loan  Short duration  Medium/large

duration

 Thrift  Emphasis on thrift as  Focus on loan only

well as loan

 Enforcement of  Group formation and  Formal procedures

repayment informal methods

 Peer pressure and  Collateral and legal

weekly repayment pressure for
repayment

 Nature of  Social organization  Commercial

organization form organization form

 Motivation  Self-help motivated  Profit motivated

 Outreach  Access to poor  Access limited

without collateral (all
 members)

3.7 Evolution of Micro Finance

The idea of microfinance somewhat strictly rolls around the philosophy of

Muhammad Yunus of Bangladesh (Nobel laureate) who initiated organization poorest of

the poor into self-help groups namely Bangladesh Grameen Bank (BGB) in the year

1976, and make them realize the basic "theory of survival". It began in 1976, with

lending of $ 27 to 42 poor people in a village next to the university campus where he was

teaching economics. He had no intention of making a wave he was planning to create a

bank for the poor. He had a modest goal. He was trying to free 42 people from the

clutches of moneylenders by giving them the money, owed to the moneylenders, in order

to repay them and become free from exploitation,

He was teaching in the Chittagone University, while a famine raged in

Bangladesh in 1974. It was uncomfortable to teach elegant theories of economics when

people were dying of hunger. He felt totally irrelevant. He tried to make himself in some

way relevant by going out to the poor people living in the village next the university

campus. Initially he looked for any little thing that he could not do to make the life of a

poor individual slightly tolerable. One thing led to another. He kept seeing how people

suffered because they could not find tinny amounts of money to carry on with their

livelihood activities. To solve this problem, they went to moneylenders. Moneylenders

turned them in to slave labour with an believable loan conditions. He wanted to see how

many people there were in the village in this situation. He made a list. The list contained

42 names, the total amount they needed was $27. It was shock to the economic profession

who taught his students about the national five-year plan and the rational for investing
billions of dollars to overcome poverty. The professor did not know that people go

through misery because they did not have access to a few pennies. Let alone a whole

dollar. Even if the government invests those billions of dollars in big projects, this need

of poor will still not be addressed.

He tried to address this problem by way of a emotional response; he gave

the money from his pocket. He did not know that it would create emotional encounter

response from the people who got the money. They thought it was nothing less than a

miracle. He thought he could make so many people happy with a small amount of money,

why not do more of the same. He decided to link the poor people in the village with the

bank located in the campus, but the bank refused to get involved. They argued that the

poor are not creditworthy. He pleaded with them to give him a chance to try. They

refused. Ultimately when he offered to become the guarantor for these loans, they

reluctantly agreed. He started giving loans to poor people in Jobra and was pleasantly

surprised to see that it was working perfectly. He continued to expand the programme.

Several stages later, they converted the project in to a formal bank, named Grameen Bank

in 1983.

Gradually a new word, 'microcredit' was coined for these kinds of

collateral-free tiny loans for income generating activities of the poor. The Grameen idea

spread all over the world. Independent studies of micro-credit programmes show that

providing easy and affordable access to credit and other financial services to poor

families can have a host of positive impact on their livelihoods. A large number of impact

studies done on the Grameen bank have shown a significant impact on the lives of its

members across the wide range of economic and social indicators, including moving out

of poverty, improved nutrition, better housing and sanitation, lower birth rate, lower child
mortality, better access to education for the children, greater empowerment of women

and increased participation of women in social and political activities.13

However, the world wide awareness and importance of microfinance for the

upliftment of the poor has been growing over the years as different countries are

attempting to device ways and means to enhance the access of the poor to credit facilities.

As a result, an intense debate has erupted among the planners, bankers and officials of the

government and non-government organization as to how financial services can be

provided to the poor in an effective, efficient and sustainable manner. Finally the attempt

and the idea has been praised world wide and the interest reached a new peak with a

micro-credit summit held in February 1997 in Washington which was considered the first

step of a decade-long campaign that seeks to ensure delivery of credit for self-

employment by 2005 to hundred million of the world's poorest families especially

women of those families.

It was in such as environment that microfinance emerged as an innovation

the world over. It was evolving into an effective system for provision of financial
services to the poor households, more especially micro-enterprises. Internationally
several variants of microfinance technology have evolved in the last two decades as also
a wide range of institutions.

3.8 Participants in the Microfinance System

1) National Bank for Agricultural and Rural Development (NABARD)

NABARD is an apex institution, accredited with all matters concerning

policy, planning and operation in the field of credit for agriculture and other economic
activities in rural area in India. NABARD was established in 1982 as a Development
Bank, in terms of the preamble of the Act, "for providing and regulating credit and other
facilities for the promotion and development of agriculture, small scale industries, cottage
and village industries, handicrafts and other rural crafts and other allied economic
activities in rural areas with a view of promoting integrated rural development and
securing prosperity of rural areas and for matters connected therewith or incidental
thereto." The corporate mission set by NABARD for making available microfinance
services to the very poor envisages coverage of the one-third of the rural poor through
one millions SHGs by the year 2006-07. The propose targets are given below in the
following table.

Table 3.2 : Target of SHG and Bank

Year No. of new Cumulative Bank loan Cumulative

SHG to be No. of SHGs requirement bank credit
linked during to be linked at during the involved at the
the year the end of the year (Rs. in end of the
year million) year (Rs. in
million)

2002-03 1,25,000 5,85,000 7,909 18,172

2003-04 1,10,000 6,95,000 14,172 32,884

2004-05 1,05,000 8,00,000 28,184 61,068

2005-06 1,00,000 9,00,000 41,256 1,02,234

2006-07 1,00,000 10,00,000 49,588 1,51,912

(Source : NABARD)

In November 1998, a high-powered task force on supportive policy and

regulatory framework for microfinance (henceforth referred to as the Task Force) was set

up by NABARD at the instance of RBI. The objective of the task force were among

others, to come up with suggestions for a regulatory framework that brings the operations
of the microfinance institutions into the mainstream, to access the possible role of self-

regulatory organization and to explore the need for a separate legal framework for

microfinance.

(ii) Reserve Bank of India (RBI)

The earliest reference to micro credit in a formal statement of monetary and

credit policy of RBI was in former RBI President Dr. Bimal Jalan's monetary and credit

policy statement of April 1999. The policy attached importance to the work of NABARD

and public sector banks in the area of micro-credit. The banks were urged to make all out

efforts for provision of microcredit, especially forging linkages with SHGs, either at their

own initiative or by enlisting support of Non Government Organization (NGOs). The

microcredit extended by the banks is reckoned as part of their priority sector lending, and

they are free to device appreciation loan and saving products in this regard.

In 1994, the RBI constituted a working group on SHGs. On the

recommendation of SHGs would be reckoned as part of their lending to weaker sections

and such lending should be reviewed by banks and also at the State Level Banker's

Committee (SLBC) level, at regular interval. Banks were also advised that SHGs,

registered or unregistered, which engaged in promoting the saving among their members,

would be eligible to open savings bank accounts with banks irrespective of their

availment of credit facilities from banks.

(iii) Self Help Groups (SHGs) :

The origin of SHGs is from the brainchild of Grameen Bank of Bangladesh,

which was founded by Mohammed Yunus, SHG was started and formed in 1975. The

establishment of SHGs can be traced to the existence of one or more problem area around
which the consciousness of rural poor is built and the process of group formation

initiated. SHG are considered a new lease of life for the women in villages for their social

and economic empowerment. SHG is a suitable means for the empowerment of women.

Since SHGs have been able to mobilize savings from persons or groups who were not

normally expected to have any 'saving' and also to recycle effectively the pooled

resources amongst the members, their activities have attracted attention as a supportive

mechanism for meeting the credit-needs of the poor (NABARD 2004). The main

characteristics of SHG are as follows:-

a) The ideal size of an SHG is 10 to 12 members (In a bigger group, numbers cannot

actively participate).

b) The group need not be registered.

c) From one family, only one member (More families can join SHGs this way).

d) The group consist of either only men or of only women (Mixed groups are

generally not preferred).

e) Women's groups are generally found to perform better.

f) Members have the same social and financial background (Members interact more

freely this way).

g) Compulsory attendance (Full attendance for larger participation).

Function of SHGs :

1) The amount may be small, but savings have to be a regular and continuous habit

with all the members. 'Savings first - credit later' should be the motto of every

group member.
2) The savings to be used as loans to members. The purpose, amount, rate of interest

etc. to be decided by the group itself. Enabling SHG members to attain loans from

banks, and repaying the same.

3) Every meeting, the group will discuss and try to find solution to the problem faced

by the members of the group.

(iv) Micro-finance Institutions (MFIs) :

A range of institutions in public sector as well as private sector offers the

microfinance services in India. Based on asset sizes, MFIs can be divided into following
categories:-

1) 5-6 Institutions which have attracted commercial capital and scaled up

dramatically when last five years. The MFIs which include SKS, SHARE and
Grameen style program but 2000, converted into for-profit, regulated entities
mostly Non-Banking Finance Companies (NBFCs).

2) Around 10-15 institutions with high growth rate, including both news recently
form for-profit MFIs. Some of MFIs are Grameen Koota, Bandhan and ESAF.

3) The bulk of India's 100 MFIs are NGOs struggling to achieve significant growth.
Most continues to offer multiple developmental activities in addition to
microfinance and have difficulty accessing growth trends.

Private MFIs in India, barring a few exceptions, are still fledging efforts

and are therefore unregulated. They secure microfinance clients with varying quality and

using different operating models. Regulatory framework should be considered only after
the sustainability of MFIs model as a banking enterprise for the poor is clearly

established.

(v) Non Government Organizations (NGOs) :

The Non Government Organizations involved in promoting SHGs and

linking them with the Formal Financial Agencies (FFAs) perform the following functions

:-

 Organising the poor people into groups.

 Training and helping them in the organizational, managerial and financial matters.

 Helping them across micro credit and linkage with formal financial agencies.

 Channelizing the group effort for various developmental activities.

 Helping them in availing opportunities, widening the options available for

economic development.

 Helping them in sustaining the group effort independently even after withdrawal

of the NGO.15

3.9 Models of Micro Finance Practices

The following are the variety of delivery models of microfinance in India.

a) The SHG-Bank Linkage Model :-

The predominant model in the India microfinance context continues to be

the SHG linkage model that accounts for nearly 20 million clients. It started as an Action

Research Project in 1989. Under this model, self help promotion institution usually a
NGO, helps groups of 15-20 individuals through an incubation period after which time

they are linked to banks. The SHG had proved their efficacy overtime but they suffer

from a meager resource base which handicapped their capacity to expand the economic

activities of their members. The factors received by the SHG members were the lack of

information, time-consuming and expensive procedures for obtaining bank loans, rigid

lending policies of the banks in respect of unit costs, unit sizes and group guarantee for

loans. There are three linking model in the country.

Model - I : SHG formed and financed by banks :- In this model, the banks play dual

role of promotion of SHGs and also provider of credit to SHGs. Up to March 2005, 21%

of SHGs financed were from this category.

Model - II : SHGs formed by formal agencies other than banks (NGOs and other)

but directly financed by banks :- In this model, the NGOs and other agencies have

played the role of facilitator. Up to March 2005, 72% of SHGs financed were from this

category.

Model - III : SHGs financed by banks using NGOs and other agencies as financial

intermediaries :- In this model, the NGOs and other agencies play the role of financial

intermediation. Up to March 2005, only 7% SHGs financed were from this category. This

in 2006-07, the country witnesses a marked proliferation of SHGs to the extent of

24,76,492. In no less discouraging terms the bank loans also amounted to Rs. 13,511.86

crores as indicated in the table 3.3.

 Table 3.3 : Progress of SHG bank linkage in India

Year New SHGs financed by Banks Bank loan (Rs. crores)

During Growth Cumulative During Growth Cumulative

the year (%) No. the year (%) Amount
No. Amount

1992-99 32,995 -- 32,995 57 -- 57

1999-00 81,780 148 1,14,775 136 138 193

2000-01 1,49,050 82 2,63,825 288 112 481

2001-02 1,97,653 33 4,61,478 545 89 1026

2002-03 2,55,882 29 7,17,360 1022.34 87 2048.68

2003-04 3,61,731 41 10,79,091 1855.33 71 3904.21

2004-05 5,39,365 41 16,18,456 2994.25 62 6898.46

2005-06 6,20,109 15 22,38,565 4499.09 50 11397.55

2006-07 2,37,927 -- 24,76,492 2114.31 -- 13511.86

(Source : NABARD - 2007)

Table 3.4 : Agency-wise number of SHG financed

Agency During 2004-05 Cumulative up to 31st March 2005

SHGs Bank loan SHGs Bank loan

No. % No. % No. % No. %

CBs 3,05,051 57 19,042 64 8,43,473 52 41,59,019 60

RRBs 1,57,848 29 8,213 27 5,63,846 35 20,995,47 30

COOPs 76,466 14 2,687 9 2,11,137 13 6,39,894 10

Total 5,39,365 100 29,942 100 16,18,456 100 68,94,860 100

(Source : NABARD - 2007)

b) Grameen Model :-

Potential clients are asked by the MFO to organize themselves into 'groups'

of five members which are in turn organized into centers of around five to seven such

groups. The loans for productive purposes are provided by the MFO directly to the

members of small groups on the strength of group insurance. Grameen model is being

followed by India by Association for Sarva Seva Farms (ASSEFA), Activities for Social

Alternatives (ASA) and other financial and technical services limited.

c) Cooperative Model :-

This has been initiated by Cooperative Development Forum, Hyderabad

which has relied upon a 'credit union' involving the saving first strategy. It has built up a

network of Women Thrift Groups (WTGs) and Men Thrift Groups (MTGs). They are

registered under Mutually Aided Cooperated Society Act (MACs) and mobilize savings

resources from the members and access outside/supplementary resources from the

individual system.

d) Partnership Model :-

The partnership model pioneered by ICICI Bank attempted to address the

following key gaps :-

  To separate the risk of the MFI from the risk inherent in the microfinance

portfolio.

 To provide a mechanism for banks to incentivize partner. MFIs continually,

especially in a scenario when the borrower entered into a contact directly with the

bank and role of the MFI was closer to that of an agent.

 To deal with the inability of MFIs to provide risk capital in large amounts, this

limits the advances from banks, despite a greater ability of the later to provide

implicit capital.

In this model, the MFI collect a service charge from the borrowers to cover

its transaction costs and margins. The lower the defaults, the better the earnings of the

MFI as it will not incur any penalty charges vis-a-vis the guarantee it.

3.10 Region wise Penetration of SHGs

Andhra Pradesh is the leading state of India in the size of the SHG

movement, measuring more than three standard deviation above the mean, i.e. 279

households participating in SHGs for every 1000 households. Orissa, Pandicherry, Tamil

Nadu and Karnataka formed the second leading group, with more than one standard

deviation above the mean. Himachal Pradesh, Kerala, Assam, Rajasthan, West Bengal

and Maharashtra formed an intermedia group with ratios within standard deviation of the

mean with 94, 85, 82, 65, 51 and 56. The other states had one unit of standard deviation

below the mean. In Uttaranchal and Jharkhand, there were less than 32 households

participating in SHGs for every 1000.

 In Jammu and Kashmir, Haryana, Punjab and Arunachal Pradesh, there

were less than ten households participating in SHGs for every 1000 of the total

households.

3.11 Rectifying Regional Skew

The SHG-Bank Linkage Programme (SBLP) expanded by 37 percent in 13

priority states which account for 67 percent of the rural poor. These states were identified

by NABARD in 2005 for special efforts and location-specific strategies. Growth was

particularly rapid in Maharashtra (72 percent). As a result, the western region

(Maharashtra and Gujrat) experienced the fastest growth (65%) of all the groups, and its

share in the total number of groups linked is now only 5 percent points behind its share of

the total number of poor, the region which have the most catching up to do are the centers

(Chhattisgarh - 33 percent, Madhya Pradesh - 24 percent, Uttar Pradesh - 23 percent) and

eastern (Bihar - 57 percent, Jharkhand - 21 percent, Orissa - 30 percent, West Bengal - 33

percent) regions, whose share of groups lag behind their share the poor by 21 and 11

percentage point respectively. Growth in the east region was 33 percent about the same as

overall national growth of 31 percent, and well below the previous year's growth of 48

percent, in the central region was only 24 percent. Despite relatively rapid growth in

priority states, the programme continues to remain heavily skewed in favour of south,

while the share of the south in linked groups came down marginally during the year.16

Asmitha :- Provides rural women access to financial resources in the form of collateral

free small loans for income generation and livelihood promotion. This enables them to

set-off small start up business as a result, low-income women become economic agents

intrinsic to development rather than simply homeworkers.

Bandhan :- Bandhan was set up to address the dual objective of poverty alleviation and

women empowerment. The microfinance activities are carried on by Bandhan Financial

Services Pvt. Ltd. (BFSPL), incorporated under the companies Act, 1956 and also

registered as a Non-Banking Financial Company (NBFC) with the Reserve Bank of

India.

Cashor India :- The mission is to identify and motivate poor women in the rural area and
deliver financial services to them.

Hand in Hand :- It is a development organization whose objective is to eliminate

poverty by creating enterprises and jobs. Focussing on help self-help, we take a holistic
approach that combines microfinance and support for women to start enterprises with
work in four other areas that matter most to poor communities : education and child
labour elimination, health and sanitation, a sustainable local environment and information
technology access. With currently more than 4,50,000 members in Tamil Nadu,
Karnataka and Madhya Pradesh, who have collectively started more than 2,50,000 micro
enterprises, our goal is to create 1.3 million jobs by 2013. Supported by international
offices in the UK and Sweden, we are now taking our model to South Africa,
Afghanistan and Latin America.

Micro Credit India :-

Today MFIs works primarily with women. Through its field staff, MFI
helps them to form Self Help Groups (SHGs), trains them in good financial practice,
facilitates access to micro credit loans, equip them with business skill and facilities access
to new markets for their products.

MYRADA :- MYRADA is a non-governmental organization managing rural

development programmes in 3 states of South India and providing on-going support
including deputations of staff to programmes in 6 other states. It also promotes the self
help affinity strategy in Cambodia, Myanmar and Bangladesh.

Saadhana :- Saadhana is a non-profit organization established in the year 2001 to reach

out the urban and rural poor women with the specific mandate to catalyze the 'endeavour
of the poor for self-sufficiency'.

Samrudhi :- Samrudhi's mission is to empower the poor and underprivileged to become

economically self-reliant by providing cost effective and need based financial services in

a financially sustainable manner.

SKS India :- launched in 1998, SKS microfinances is one of the fastest growing

microfinance organizations in the world. SKS also offers interest-free loans for

emergencies as well as life insurance to its members. Its NGO using SKS foundation runs

the ultra poor program. SKS currently has microfinance branches in 19 states across

India. SKS aims to reach members 15 millions by 2012. In the last year alone, SKS

microfinance has achieved nearly 170% growth, with 99% on-time repayment rate.

Spandana :- Spandana is one of the largest and fastest growing microfinance

organizations in India, with 1.2 million active borrowers in March 2008, up from 520

borrowers in 1998-99, its first year of operation (Mix Market 2009). From its birth place

in Guntar, a dynamic city in Andhra Pradesh, and several others. The basic Spandana

product is the canonical group loan product, first introduced by the Grameen bank. A

group is comprised of 6 to 10 women and 25-45 groups form a center.17

3.12 Different Modes of Services Provides by MFIs

 Microfinance sector has covered a long journey from micro-savings to

microcredit and than the microenterprises and now entered the field of micro insurance,

micro remittance, micro pension and micro livelihood.

Micro-savings :- These are deposit services that allow one to save small amounts of

money for future use. Often without minimum balance requirements, these savings

accounts allow households to save in order to meet unexpected expenses and plan for

future expenses.

Micro-credit :- Microcredit is the extension of micro loans to the unemployed, to poor

entrepreneurs and to other living in poverty that is not considered bankable. Microcredit

can be offered often without collateral, to an individual or through group lending.

Micro-insurance :- It is system by which people, business and other organizations

makes a payment to share risk, microinsurance products are mainly targeted at low

income groups in the unorganized sector, farmers and craftsmen. The amount of premium

these schemes ranges between Rs. 20.00 to Rs. 500.00. The finance minister recently

considered two schemes, 'Aam Admi Bima Yojana' to extend death and disability

insurance and 'Rashtriya Swasthya Bima Yojana' a health insurance schemes for below

poverty line families.

Remittances :- These are transfer of funds from people in one place to people in another,

usually across borders to family and friends. Compared with other sources of capital that

can fluctuate depending on the political or economic climate, remittances are a relatively

steady source of funds.18

3.13 Legal Framework of Microfinance Institution in India

 Institutional microfinance is defined to include microfinance services

provided by both formal and semi-formal institutions. Microfinance institutions are

defined as institutions whose major business is the provision of microfinance services.

Actually microfinance represents more than microcredit as it refer to savings products, to

insurance, to pawns and remittances in sum to a much wider range of financial. Two

overlapping categories of microfinance initiatives are poverty lending and microbanking

poverty lending programmes and institution often offer savings and insurance services as

well. The objective of the poverty lending programmes is to give higher priority to social

outreach than financial sustainability, through an organization may strive for both. The

main focus of micro-banking on the other hand, is income promotion by MFI and a drive

for financial sustainability as a permanent financial intermediary. There are a host of

microfinance institution in India. They assume paramount importance in the context of

pension reform as they have the ability to mobilize large amount of savings from people

who are beyond the purview of formal sector mechanism.

There are four types of structure as follows :

Microfinance institution in India

Charitable Co-operatives Companies Banking

Institution Institutions

Societies, Trust State and National NBFC LAB

etc. Cooperatives

1) Microfinance Institutions as Charitable Institutions :

 These are societies registered under Societies Registration Act, 1860 and

trusts registered under Trust Act, 1882. They work on grants. They are not able to handle

funds of SHGs or acts as an intermediary beyond a level. They are not allowed to raise

equity and mobilize deposits. These structural restrictions limits the availability of capital

to these MFIs. Often these institutes are found to services on foreign grants.

2) Micro-finance Institutions as Cooperatives :

Cooperatives have legal sanction to work as financial intermediaries. The

activities of state co-operatives are restricted in the state. Their activities are heavily

controlled by the controlling authority, Registrar of the cooperative societies and the state

government. National co-operatives need lesser government control than state

cooperatives for multi state operations. Cooperatives are allowed to raise share, to

mobilize deposits. No tax is charged on cooperatives. They can get foreign debt but are

not allowed to raise foreign equity. The New Generation Cooperative Act (for example,

Mutually Aided Co-operative Societies Act, 1995, in Andhra Pradesh) has become

landmark legislation. It has been used by other organizations and as well as by

associations like SHGs, Grameen Joint liability groups. According to this Act, there is

less government control on mutually aided cooperative societies but they can be

incorporated within a state only. Presently, cooperative societies in nine states (Andhra

Pradesh, Jharkhand, Bihar, Jammu & Kashmir, Madhya Pradesh, Chhattisgarh, Orissa,

Karnataka and Uttaranchal) are registered under this new Act. This Act reduces the role

of registrar, gives greater flexibility in savings mobilization and fund utilization and

allow the cooperatives to set up subsidiary organization.

3) Microfinance Institution as Companies :

 MFIs have to have Rs. 2 crore as its initial funds if these are operating as

Non Banking Financial Companies (NBFC). These MFIs are required to obtain a

registration certificate from RBI (under section 45-1A of the RBI Act) after satisfying the

initial conditions. They are allowed to mobilize deposits after satisfying conditions

stipulated by RBI. After two years of their operations, they have to obtain minimum

investment grade or other specified credit rating for fixed deposits from any one of the

RBI recognized credit rating agencies at least once a year. They are then required to

forward it to the RBI along with the annual returns. They are allowed to collect foreign

equity upto 51% of US $ 0.5 millions; more than 51% to 75% of US $ 5 million and

100% of US $ 50 million.

A NBFC is also exempted from RBI registration if it does not deliver credit

of more than Rs. 50,000 for a business enterprise and Rs. 25,000 for meeting the cost to

raise the level of income of a poor person. This NBFC is licenced under section 25 of the

Companies Act, 1956. It is not allowed to accept public deposits. Recently seven

categories of NBFCs are exempt from RBI registration Housing finance companies,

Mutual benefit financial companies (Nidhis), Insurance companies are important in these

exempted categories.

4) Microfinance Institutions as Banking Institutions :

The MFIs who are operating as banks are registered under RBI but it is

very difficult to obtain this registration. These institutions are regulated by RBI on daily

affairs. To set up a MFI as a bank, it would require initial capital from Rs. 100 to 300

crore. For local area bank the amount is Rs. 5 crore. Local area banks are permitted to

operate on three contiguous districts in a state. These are also highly management and
technology intensive to achieve sustainability. These MFIs are permitted to deliver credit

to mobilize savings and to give insurances (under the registration of IRDA).19

3.14 Microfinance Delivery Models in India

There exist a wide range of microfinance in India. It can be said that India

hosts the maximum numbers of microfinance models. Each model has succeeded in their

respective fields. The main reason behind the existence of these models in India may be

due to geographical size of the country, a wide range of society and cultural groups, the

existence of different economic classes and a strong NGO movement.

Microfinance Institutions (NGO-MFIs, Mutual Benefit MFIs and For-profit

MFIs) in India have adopted various traditional as well as innovative approaches for

increasing the credit flow to the unorganized sector. They can categories into four broad

categories. (1) SHG Model (2) Federaled SHG Model (3) Grameen Bank Model (4) Co-

operative Model

We discuss important features of these four micro-finance model. These

models vary in their legal form, in the channels and methods of delivery, in their

governance structure, in their approach to sustainability and also in their approach to

microfinance.

1) Self-Help Group (SHG) Model :

SHG has emerged as the 'Indian model of microfinance'. It is so popular in

India that government programmes have SHG as the core of their strategy.

Dynamics of SHG Model :-

1) The SHG model has evolved in the NGO sector, NGOs primarily have the

functions of enabling, educating and networking. This model has emerged as the

capacity building of community based institutions.

2) SHGs are small and informal groups (strength of members :- 10 to 20). Group

members are socio-economically homogeneous.

3) Groups are composed either by male only or by female. In India 90 percent of the

SHGs are composed of female only.

4) Group members are self-selected act as a facilitating agency to build processes and

systems that makes the SHGs viable and sustainable institutions.

5) The group members meet regularly at an appointed time and place for carrying out

their savings and credit activities and other issues of development.

6) The group mobilizes savings among the members and issues need based loans to

the members (only) of the common funds created.

7) The rules and norms are determined by members themselves and the NGO does

not interfere in this matter.

8) After the SHG has been put on the path to sustainability, organizationally and

financially, the NGO may decide to withdraw from supporting the SHG and move

on to new groups.

9) The main motto of the SHGs is to empower poor socio-economically and their

livelihood pattern.

2) Federated Self Help Group Model :

 Federation of SHGs bring together several SHGs. In India, FSHGs includes

those promoted by the Dhan Foundations, PRADAN, Chaitanya and SEWA are famous

in India.

Dynamics of Federated SHG Model :-

1) Federations usually come under the Societies Registration Act. They have between

1000-3000 members.

2) There is a distinct three-tier structure in federations - the SHG is the basic unit, the

cluster is the intermediate unit and an apex body or a federation, represents the

entire membership.

3) Each SHG participates directly in the representative body at the cluster level. Two

members from each SHG attend the monthly cluster meetings. Information from

the groups to the apex body and vice-a-versa is channeled through the cluster level

representative body.

4) The cluster leaders are a highly effective part for group monitoring and

strengthening, so the operations of the apex body are decentralized through the

clusters.

5) The executive body at the apex level is consists of 9 to 15 members.

6) Three common financial activities of federations are :-

(a) Acting as an agent and managers of external credit funds.

(b) Assisting SHGs with loan recovery in difficult cases.

(c) Strengthening weak SHGs, so that they are able to carry out their savings

and credit functions smoothly.

7) Other financial services provided by the federations are :-

(a) Additional options for members to save : federations often offering

additional savings schemes to the group members, which is apart from

group savings. So the members have savings with the group and in

addition, with the federations.

(b) Satisfactory returns on savings to members.

(c) Credit giving patterns also vary. Generally federations have credit activities
at the group level, although, federations provide credit to the members,
these loans are disbursed from member's savings that may be deposited
with the federation and from the external funds that it is able to access
independently, federations are able to increase the amount of credit
available to members. Federations even provide bridge loans.

(d) Federations provide insurance and housing finance, and also support
services to facilitate productive use of credit. One federation in India
(Chaitanya) started to provide insurance services to its members. It has
become an agent of the insurance company.

3) Grameen Bank Model :-

The Grameen Bank model of Bangladesh, developed by Muhammad

Yunus, its former chairman was considered as the pioneer microfinance institution. It has
been highly successful in its banking service to the poor as well as in its poverty
alleviation programmes. With its well-recognized success, many organizations in India,
like SHARE Microfin Ltd., Activities for Social Alternative (ASA) and CASHPOR,
Financial and Technical Services Ltd. have adopted this methodology with little
variations.
Dynamics of Grameen Bank Model :-

1. Homogenous groups of five members are formed at the village level.

2. The field worker of the Grameen Bank facilities the process of group formations.

3. All the group members undergo a 7 days compulsory training of 1-2 hours per

day. Some groups undergo the Group Recognition Test (GRT). It is a screening

test that can distinguish between serious and non-serious groups.

4. Once the preliminary groups have passed GRT, and then the women become

members of Grameen Bank by paying a one-time member fee.

5. Eight join liable groups affiliate together to form a center. Every week center

meets at a defined time. Bank Assistants attends the meetings and it is mandatory

for the members to attend the weekly meeting and all the loan applications have to

be approved by other group members as well as center members. The loan is

disbursed from the bank fund and it is not linked with the group savings. Loan is

given to the individual not to the group or the center.

The loan disbursement is always done in the center. The housing loans are

disbursed at the Branch to maintain documentation.

Various loans are provided by the Grameen Bank such as general loans,

supplementary loans, special loans, sanitations and housing loans etc. The size of loan

ranges from Rs. 4,000 to Rs. 10,000 for general yearly loans. The first loan is Rs. 4,000

and there is an annual increase of Rs. 1,000 in loan size in each year thereafter.

Every member save Tk. 10 per weak and it is compulsory. This saving is

deposited with Bank. The Bank funds their consumptions with this deposit. This strategy
overcomes the problem of default as it is proved that nobody is likely to default on his or

her own money.

All loans are repayable within a year in 52 equal installments (over 52

weeks). Bank charges 5 per cent tax on all productive loans to a member. In this way

group fund is increasing.

The group leader collects the loan repayments and savings prior to the

meeting and hands its over to the center leader who gives it to the field worker during the

meeting. This collected amount is deposited in the branch on the same day. No new loan

is issued from this collected amount. It discouraged all possible leakages in monetary

transactions.

Peer pressure replaces the collateral. Member-borrowers who repaid the

loan in time are allowed to get repeated loans and conditions access to increasing credit

from bank. The most significant aspect of the Grameen Bank model has been its high

loan recovery rate (98% and above).

4) The Cooperative Model :

The leading organizations that has been successful in using the cooperative

form in rural microfinance in India has been the Cooperative Development Forum (CDF),

Hyderabad. It has built up a network of financial co-operatives based upon women's and

men's thrift groups. It has registered under the New Generation Co-operative Act, 1995.

Dynamics of Co-operative Model :-

1. The primary entities of CDF's microfinance co-operative are the women's/men's

thrift cooperative (W/MTC). Each consist of 300 members. Generally these

members reside in the same village.

2. CDF has started to promoted much smaller units and now it has encouraged these

units to extend into large unit.

3. The important factors behind the running of a successful co-operative venture are :

(a) to justify human resources (staffs)

(b) to meet statutory administrative requirements such as audit.

4. The WTC or MTC are divided into small groups (10 to 15 members) to facilitate

better monitoring of thrift and repayment of loans.

5. The group member nominate a group leader and the leader enjoyed the confidence

of the group.

CDF encouraged members to identify more strongly to identify more

strongly with their WTC/MTC rather than with the groups, as WTC/MTC are the primary

legal entities and viable units of operation.

 Most of the WTC/MTCs decided to register themselves under the New Generation

Cooperative Act, which allows for greater flexibility and autonomy in operations.

 The General Body constitutes of all the members of primary cooperatives. It

adopts a uniform set of bylaws. The General Body meets once in a year to select

the directors, review and discuss the other issues. The Board of Directors consists

of 12 directors who are elected by the members.

 Each director is elected for three year term. The retired directors are eligible for

re-election.
  The directors elect a chairperson and appoint a Managing Director (MD) among

themselves. The chairperson and MD have a one year term. They are also eligible

for re-election.

 The chairperson presides the board meetings. He/She represents the cooperatives
in other organizations (Forums) and ensures that they function in accordance with
the cooperative principles and bylaws.

 The MD is responsible for ensuring that the operations of cooperatives are

properly conducted and that the resolutions of the boards are implemented.

 A set of geographically continuous cooperatives forms an association of

WTC/MTC. The chairperson and MD of each participating cooperatives are
members of the general body of the associations.

 General Body elects a chairperson and MD to oversee the affairs.

 The Associations provides training, management of the loan insurance fund and
inter-lending. It also plays a support role by helping the member cooperative in
handling accounting, auditing and other administrative matters.20

3.15 Case Study

1) SEWA (Self Employed Women Association) :

SEWA supports 1600 SHGs with 38,000 members in rural Gujrat. It is

observed that urban members of SEWA were saving 4.1 percent of their income and rural

member 1.9 percent (Awano, 1996). At the end of 2001, SEWA bank had over Rs. 30

crore in 1,20,000 deposit accounts. SEWA credit is current credit-deposit ratio is 31 (in

other words Rs. 10 crore are lent out to members of the 30 crore deposit). The research

revealed that savings are unlikely to be significant to cover all uncertain consumption
needs. They need emergency loans and insurance services. SEWA started insurance

services in 1992 and provided against premiums paid annually by members. About 25000

women have invested in fixed deposits that earn interest to cover the yearly insurance

premiums needed. About 33,000 women had outstanding loans, 33 percent of these loans

were taken as working capital, 17 percent for personal, 10 percent for investment and 40

percent for housing loans.

2) SHG-Bank Linkage Programme :

NABARD (National Bank for Agriculture and Rural Development) had

circulated guidelines to banks for financing SHGs in 1992 under a pilot project that

aimed at financing 500 SHGs across the country through banking system. Different banks

financed about 600 SHGs by March 1993. This encouraged the RBI in 1996 to include

financial SHGs as a mainstream activity of banks under their priority sector lending. At

the end of March 2002 (NABARD and microfinance, 2001-2002), banks financed about

461,478 SHGs. About 7.8 million poor households access credit through 17,085 branches

of formal banking system under this programme. It is the largest microfinance

programme in term of outreach. Banks have disbursed Rs. 4530 millions as loan to new

SHGs and Rs. 924 millions to the existing SHGs in 1992. This programme has covered

488 districts in different states and union territories of India. Almost all members

developed savings habit in the post-SHG situation as against only 23 percent of

households ho had this habit in pre-SHG situation. About 70 percent loans were taken for

income generation activities in post-SHG situations.

3) BASIX :-

BASIX is the second largest MFI in India in terms of outreach and

development in integrating micro-credit and livelihood promotion. It has financial

operations in 2200 villages in 18 districts across four states (Andhra Pradesh,

Maharashtra, Karnataka and Orissa) and works in a further five stated (Assam,

Jharkhand, Madhya Pradesh, Rajasthan and Tamil Nadu) in assisting other MFIs. Upto

2001, BASIX disbursed more than 60 crore in 58,000 loans, outstanding loans stood at

Rs. 20 crore among 21,000 active borrowers. The repayment rate is 91 percent. BASIX

has been highly successful in attracting loans and equity from both national and

international sources. It has secured Rs. 26.3 crore of total loans from Ford Foundations,

the Swiss Agency for Development and Cooperation (SDC), (Shorebank Corporation

USA), Cordaid (Netherlands), Development International Desjardins (Canada) and Rs. 12

crore from Global Trust Bank, ICICI, HDFC and SIDBI in India. It has raised Rs. 11.9

crore in equity from IFC, World Bank affiliate, Shore Bank Corporation and Hivos-

Triodas Fund (the Netherlands), ICICI Bank and HDFC. BASIX has provided two types

of loans (a) Direct loans for extended directly to rural producers by BASIX and (b)

Indirect loans are extended through intermediaries. These intermediaries includes SHGs,

other community-based financial organizations and market agent (such as input dealers,

wholesale merchants etc.). BASIX has been able to disburse 80 percent of total loans

indirectly. About 40 percent of lending was to non-farm sector, 20 percent to dairy and

other livestock and 30 percent to agriculture. About 10 percent of loans were lent to

women's SHG (classified as general purpose loans). BASIX has supported over 40,000

livelihoods (250 persons days of employment are equivalent to a full time livelihood).

4) Cooperative Development Foundation (CDF) :

Cooperative Development Foundations in Andhra Pradesh has worked with

the mainstream cooperative structure throughout its existence. It has a membership of

6000 (with more than half being small and marginal farmers) and has a total turnover of

Rs. 32 crore in trading and Rs. 9 crore outstanding in loans to members. Within a decade,

these cooperatives in two backward districts of Andhra Pradesh has grown to 350 in

member, with more than 1,00,000 members and with Rs. 12.5 crore in savings. It is

comparable to any large MFI in India. In CDF, members made interest rate deposits

under the Death Relief Assurance Scheme. These deposits are in turn invested in other

securities and the earned income is set aside for contingencies.

5) SHARE Microfin Limited :-

The prime objective of SHARE Microfin Limited is to provided financial

and support services to the poor women living below the poverty line. It enables these

women to take income generating activities. It is registered as a public limited company

under section 25 of the Companies Act and it is also registered with the RBI under

section (45/1A) as a NBFC. It has an authorized capital of Rs. 15 crore and an amount of

Rs. 5.09 crore has been paid up by 26,034 poor women. The company is owned and

managed by the poor women. It is operating in 2990 villages in the three states in India.

This MFI has disbursed Rs. 3,662,707,780 as a loan among which Rs.

2,843,277,300 is recovered and Rs. 819,430,480 is outstanding at the end of March 2004.

The repayment rate is 100 percent.21

3.16 Micro-Enterprises

Since independence out success in the development sectors are only

moderate. Unemployment and poverty still pose major challenges for us, especially in

rural areas. It all happened irrespective of the high opportunities of employment

generation lies in agriculture sector and rural non-farm sectors (RNFS). Microenterprises

can play an important role in improving the quality of life and poverty alleviation.

Microenterprises, whether in the informal or organized sectors, provide opportunities for

gainful employment while preserving the social structure. Microfinance can play an

important role to meet credit needs of rural poor. According to Singh (2002), "In India,

the need for microfinance is higher as the demand for credit to start micro-enterprises by

the poor people could not be met by the institutional initiatives of rural finances up to

large scale. Due to the failure of percolation theory of social development, poor people

are highly dependent on the institutional source of credit. Growth of microfinance in

India has been in response to the failure of institutional initiatives of rural credit and

exploitation attached with informal system of credit." NGOs in India acted very promptly

for the growth of microfinance sector as it provides spaces to the poor people to use their

on savings for credit linkages and finally starting the viable enterprises.

The term 'micro-enterprise' refers to a very small-scale, informally

organized business activity undertaken by poor people.

3.16.1 Need and Importance of Micro-Enterprise :-

Micro-enterprise is a proven way to strengthen viable small businesses

resulting increased households income and savings and this the alleviating economic

poverty.

Mentioning the importance of micro and small enterprises (MSEs) in India,

"Micro and small enterprises (MSEs) constitute an important segment of the Indian

economy. Besides providing employment to nearly 25 million persons, mostly belonging

to the lower rung of socio-economic strata in the society, the sectors helps the process of

economic diversification, utilization of otherwise dormant resources, balanced regional

development, production of and demand for wage goods, equitable distribution of

income, and widening the base of entrepreneurial supply."

Promotion of micro-enterprises is a viable and effective strategy for

achieving significant gains in income and assets for poor and marginalized people. The

microenterprise programs helps people to build human, financial and social capital for the

development of micro-businesses that will improve people well being. NGOs are playing

important role as catalyst in helping the rural unemployed persons to acquire training

through MEDPs (Micro-Enterprise Development Programmes) so that they can become

self employed by starting their enterprise in RNFS. Moreover, they can also become job

providers instead of job seeker. Thus institutionalization of MEDPs through NGOs can

be an alternative approach of rural development in India.

Entrepreneurship Development Programme (EDP) means a programme of

entrepreneurship development designed to help a person in strengthening her/his

entrepreneurial motive and in acquiring skill and capabilities necessary for playing

his/her entrepreneurial role effectively. To make EDP successful and effective, the role of

the NGOs has significant important in terms of identification of place or location,

promotional activities, selection of potential entrepreneurs, entrepreneurial training,

monitoring and follow up mechanism.

Micro entrepreneurship through microfinance has become a modern

economic weapon for the poor to fight against poverty and employment. But it has long

way to become successful. Many programmes from IRDP to SGSY were started by the

government enthusiastically but they were not able to achieve their objectives. The

reason behind this is poor follow up, lack of management and participation from the
government as well as people. No programme can never ever get its ultimate result unless

and until there is coordination and cooperation between government and beneficiaries.22

3.16.2 Case Studies - Empowering client through micro-enterprise :

The story of Dipa Pise illustrated the direct links between innovative

entrepreneurship by rural women and their ability to obtain credit from cooperative

banks. Dipa Pise was running a poultry business, but was continually losing money i.e.

she was in loss. She has decided to start a business of making the paper cups, which are

used for giving 'prasad', and with a Rs. 15,000 loan from State Bank of India, she was

able to buy the machine and begin marketing of her cups. Today she has expanded her

business into a dealership where she provides these machines and marketing services to

numerous women, and is running a successful and growing micro-enterprise business.

Dipa's story shows that the loans required by micro-entrepreneurs are quite small, and

since their economic enterprises are small, they should also be expected to repay their

loan in small doses. Mann Deshi has employed this method, and has been able to recover

98 percent of this loans, by maintaining realistic expectations from our clients and

providing them with the services they require. One of those services is providing access

to markets, through savings and loans suited to their ambition. Dipa's story is only one

example of the way in which cooperative bank can motivate the micro-enterprises of

women and promote the economy of semi-urban centers. When women get the additional

income, they want to invest in health of the family and the education of the children.

Women are ready to buy the health insurance but it is pathetic that in spite of so many

companies, health insurance is still a luxury for the urban people and the workers from

the organized sector. 20 Percent of the population is not insured in rural areas. 90 Percent
of the population cannot even dream as there is no availability. Mann Deshi Mahila Bank

and the association are trying hard to workout the product with the partners.

3.17 Micro-Insurance

Microinsurance can boost resources for the rural poor, governments, and

private sector. The entire economy gains as the insurance industry matures further, as

well. There is robust need for microinsurance in India's poverty reduction strategy. With

insurance, the vulnerable can prepare for an adverse event before it occurs, instead of

being paralysed by shocks afterwards. Microinsurance also increase the livelihood that

the poor eat well, have health access, and send their children to school, since they would

not have to save as much for emergencies. Potential clients would typically earn around $

2 a day or even less.

Six key areas, which need to be addressed to propel micro-insurance is -

1) Demand and supply 2) Product design 3) Pricing

4) Distribution and outreach 5) Procedure 6) Regulation.23

3.17.1 Provision of Micro-insurance for SHG Member :-

Presently there is a death of micro-insurance product in the market, which

can take care of the needs of the SHG member, as they require composite insurance

product, which take care of their health, assets and life risk. Hence it is desirable to

evolve a suitable insurance product/s. However, a few insurance companies both in the

public and private domain are involved in evolving suitable model of insurance package

which can suit the needs of poor as well as its financial viability and sustainability.

It is widely recognized that microfinance has been a successful

methodology for providing much needed financial services to the poor on a sustainable
basis. This access of financial services has enabled a large number of poor throughout the

developing world to make significant progress in their own efforts to challenge poverty

through the existence of options. It is generally agreed that the impact of microfinance on

poverty reduction has been significant. Versions vary depending upon the sample site and

sample size. Some of the empirical findings are that microfinance has reduced the

incidence of poverty through increase in income; building assets and thereby reducing

vulnerability. The reports are that the households having access to microfinance spend

more on education than non-client households. They send their children to school and

there is reduction in the drop-out rate in the higher primary grades. The housing

conditions generally improved from kutcha to pucca housing; the share of consumption

loans declined from 50 percent to 25 percent; employment increased by 18 percent. The

involvement in the group significantly contributed in improving the self confidence of the

members. The feeling of self-worth and communication with others improved after

association with SHGs. The members were relatively more assertive in confronting social

evils and problem situation. As a result there was a fall in the incidence of family

violence.24

Micro-insurance plays a vital role as part of social society. The rural

women are deprived from the services of insuring themselves. Considering the crying

need for vulnerability reduction, we provide insurance service at the doorsteps of the

rural women. Group insurance for accident benefit for Rs. 25,000/- is provided through

Rajrajeshwari Mahila Kalyan Vima Yojana at a premium of Rs. 15 per head and life

insurance of Rs. 5,000/- at a premium of Rs. 50 per women is provided. Cattle insurance

and insurance for assets are the other areas here insurances are provided.
 Recently, a lady viz. Sunita a member of an SHG was insured under

Rajrajeshwari Mahila Kalyan Vima Yojana. Unfortunately she died by the accident

leaving behind a one year child Swapnil. The insured amount of Rs. 25,000/- was handed

over to the son in the forms of National Savings Certificate which will be useful for his

future studies.

Distribution to low-income populations is critical. Some examples of

distribution for better outreach in rural area exist, generally using intermediataries like

non-governmental organizations (NGOs) or Micro-Finance Institutions (MFI) already

working among the target population. Their financial viability seems to depend on

availability of soft funds for initial market penetration and development of distribution

channel. Innovations in delivery channels should not be ruled out, meanwhile.25

Table 3.5 : Details some possible delivery channels within India for the Industry

S.N. Possible delivery channels in India for Amount (Rs.)

microfinance

1. Self Help Groups linked to banks 1,618,476

2. Non-governmental organization as development 200,000

facilitor (approx.)

3. Non-governmental organization involved in 3,024

microfinance

4. Rural and semi-urban commercial bank branches 33,388

5. Regional rural bank branches 14,446

6. Private fertilizer dealers 192,000

 7. Primary agricultural cooperative societies 105,735

8. Post offices in rural areas 138,756

(Source : NABARD and RBI, Annual Report, 2006)

REFERENCES

1. Sangita Kamdar, "Microfinance, self-employment and poverty alleviation",

Humalaya Publishing House, 2007, p. 15-16.

2. K.K. Tripathy, "Microcredit intention and poverty alleviation", Kurukshetra, 54,

No. 11, September 2006, p.

3. Sampath Guha and Gautam Gupta, "Micro-credit for income generation, Role of
ROSCA", Economical and Political Weekly, XI, No. 14, April 2-8, 2005, p. 1470.

4. Rajaram Dasgupta, "Microfinance in India, Empirical Evidence Models and Policy

Imperatives", Economical and Political Weekly, XI, No. 2, March 2005, p. 1239.
5. Lekshmi R., Kulshreshta and Archana Gupta, "A study of microfinance in India -
Delivery system and impact analysis with special emphasis to women upliftment",
Sajosps, 3, No. 1, December 2002, p. 105.

6. Building sustainable microfinance system : A growth catalyst for the poor,

LOGOTRI Research Study, Society for Development Studies, February 2006, p.

7. Jothi V.N., "Socio-economic impact : Microfinancing of self help groups", SGMS

Journal of India Management, January-March 2010, p. 91-92.

8. Lekshmi R., Kulshreshta and Archana Gupta, "A study of microfinance in India -
Delivery system and impact analysis with special emphasis to women upliftment",
Sajosps, 3, No. 1, December 2002, p. 105.

9. Ruby, J.A., "Microfinance and Women Empowerments, A Study of

Kudumbashree project in Kerla", Mahatma Gandhi University, Kottayam, July
2008, p. 57-58

10. Archana Singh, "Microfinance for women's empowerment, A perspective",

Kurukshetra, 52, No. 6, April 2004, p. 32.

11. N. Tejmani Singh, "Microfinance practices in India : An overview", International

Review of Business Research Paper, vol. 5, p. 134-135.

12. Ruby, J.A., "Microfinance and Women Empowerments, A Study of

Kudumbashree project in Kerla", Mahatma Gandhi University, Kottayam, July
2008, p. 60-61.

13. Mohammad Yunus, "Grameen Bank, microcredit and millennium development

goals", Economical and Political Weekly, XXXIV, No. 36, September 4-10, 2004,
p. 4077.

14. P. Satish, "Mainstreaming of microfinance", Economical and Political Weekly, XI,

No. 7, April 23-29, 2005, p. 1731.
15. N. Tejmani Singh, "Microfinance practices in India : An overview", International
Review of Business Research Paper, vol. 5, p. 135-138.

16. Ibid, p. 140-142.

17. Reeta Raufela, Gaurao Pant and others, "Microfinance - A new mantra for rural
development", International Journal of Science, Technology and Management,
December 2010, p. 3-4.

18. Ibid, p. 2-3.

19. Sampati Guha, "Salient features of microfinance institutions in India", IRPF

Working Paper Series No. 01/04, p. 1-5.

20. Ibid, p. 6-13.

21. Ibid, p. 14-18.

22. Tiyas Biswas and P.P. Sengupta, "Role of microfinance in promoting micro-
entrepreneurship : The Indian experience", International Journal of College
Science in India, vol. 3, 2 July 2009, p. 75.

23. Anuruddha Rajivan, "Micro-insurance in India", Yojana, January 2008, p. 17.

24. Aniruddha Mirikar, "Reducing poverty, creating livelihood, opportunities through

environmental regeneration, microcredit and micro-enterprise development", in
Sangita Kamdar (ed), Microfinance, Self-employment and poverty alleviation,
Himalaya Publishing House, 2007, p. 187.

25. Anuruddha Rajivan, "Micro-insurance in India", Yojana, January 2008, p. 25.